LOS b, (Part 2): Explain the equivalence of a plain vanilla swap to a combination of an interest rate call and interest rate put.

Q1. Writing a series of interest-rate puts and buying a series of interest-rate calls, all at the same exercise rate, is equivalent to:

A)   being the floating-rate payer in an interest rate swap.

B)   being the fixed-rate payer in an interest rate swap.

C)   a short position in a series of forward rate agreements.

Q2. For a 1-year quarterly-pay swap, an equivalent position with short puts and long calls would involve:

A)three put-call combinations expiring on the first three settlement dates of the swap.

B)put-call combinations expiring on each of the four settlement dates.

C)three put-call combinations on the last three settlement dates of the swap.

Q3. The fixed-rate receiver in a plain vanilla interest rate swap has a position equivalent to a series of:

A)   long interest-rate puts and short interest-rate calls.

B)   long interest-rate puts.

C)   short interest-puts and long interest-rate calls.

Q4. The fixed-rate payer in an interest-rate swap has a position equivalent to a series of:

A)   short interest-rate puts and long interest-rate calls.

B)   long interest-puts and short interest-rate calls.

C)   long interest-rate puts and calls.

Q5. Which of the following is equivalent to a pay-fixed swap with a tenor of two years with semi-annual swap payments and a fixed rate of 6% (exchanged for LIBOR)? The notional principal is $100,000,000.

A)   A forward rate agreement, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.

B)   A strip of three forward rate agreements, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.

C)   A strip of two forward rate agreements, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.

Q6. The floating-rate payer in a simple interest-rate swap has a position that is equivalent to:

A)   issuing a floating-rate bond and a series of long FRAs.

B)   a series of long forward rate agreements (FRAs).

C)   a series of short FRAs.

Q7. Which of the following is equivalent to a receive-fixed swap with a tenor of one and a half years with semi-annual swap payments and a fixed rate of 5% (exchanged for London Interbank Offered Rate (LIBOR))? Assume that the notional principal is $10,000,000.

A)   A strip of two forward rate agreements, which obligates the party to receive a fixed rate of 5% and pay six-month LIBOR on a notional principal of $10,000,000.

B)   A forward rate agreement, which obligates the party to receive a fixed rate of 5% and pay six-month LIBOR on a notional principal of $10,000,000.

C)   A strip of three forward rate agreements, which obligates the party to receive a fixed rate of 5% and pay six-month LIBOR on a notional principal of $10,000,000.

Q8. A plain vanilla interest-rate swap to the fixed-rate payer is equivalent to issuing a fixed-rate bond and:

A)   buying a floating-rate bond.

B)   selling a series of interest rate puts.

C)   selling a series of interest rate calls.

Q9. Which of the following is equivalent to a plain vanilla receive-fixed interest rate swap?

A)   A long position in a bond coupled with the issuance of a floating rate note.

B)   A short position in a bond coupled with a long position in a floating rate note.

C)   A short position in a bond coupled with the issuance of a floating rate note.

Q10. Which of the following is equivalent to a plain vanilla receive fixed currency swap?

A)   A long position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note.

B)   A short position in a foreign bond coupled with a long position in a dollar-denominated floating rate note.

C)   A short position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note.

kts